Here comes BNPL regulation for Australia

Written by Kapronasia || June 10 2024

Despite the best lobbying efforts of certain industry players, Australia is moving forward with long-running plans to rein in the buy now, pay later (BNPL) segment of digital financial services. Provided that the bill introduced on June 5 becomes law, BNPL firms in the country will be required to run credit checks on borrowers and hold an Australian Credit License (ACL).

It is risky in the financial services sector – especially on the consumer side – to base your business model on regulatory loopholes. BNPL has thrived in Australia in part because fintech providers of the service figured out they could provide installment loans to consumers quickly and conveniently without having to go through the same processes as credit cards or other forms of regulated lending. For incumbent financial services firms that have introduced BNPL products, the situation is different as they do not depend on BNPL for their livelihoods and already hold a credit license. For a big bank, performing the same check on a borrower that it does for a credit card will be no sweat off its back.

But what about a fintech that has relied on merchant fees from its BNPL products to drive earnings? For consumers, the attractiveness of these platforms has been their low barrier to entry as well as the lack of interest fees as long as installment payments are made on time. Because BNPL has exploded in popularity and brings in a lot of business, merchants have been willing to tolerate the fees charged by the platforms. Now that business model faces its most significant challenge to date.

Meanwhile, BNPL has become a big business in Australia in recent years. Data compiled by Australia’s Department of the Treasury show that the country has about 7 million active BNPL accounts with an average transaction amount of A$136. So about 28% of Australians are using BNPL regularly.

To be sure, questions remain about implementation of the law. It is not immediately clear when that will happen. Industry players do not appear to all be on the same page about regulation either. For instance, Zip co-founder Peter Gray has welcomed the government's announcement and said the legislation would align with the company's existing practices.

Afterpay, on the other hand, does not seem pleased about the prospect of being regulated like other credit providers and objects to some specific aspects of the regulatory framework. “There are provisions within the modified framework that have been imported from the traditional responsible lending framework that, in practice, make little sense for [BNPL] providers, emerging consumer preferences, and resulting consumer outcomes,” Afterpay said in a submission published by Treasury.

Afterpay is urging the Treasury Department to align the regulatory framework with that of New Zealand, which comes into effect September 1 and requires inquiries about the borrower’s “needs and objectives” and allows credit scores be used as a proxy for income and expense data.

For its part, the Australian Securities and Investments Commission seems to believe that the bill does not go far enough. It wants the legislation to expressly require providers to look at the size of customers’ other debts or any defaults associated with them.

It will be interesting to see how the final legislation turns out, as different stakeholders seem to be fairly far apart on key aspects of it. That said, it appears inevitable that the BNPL segment is set for a period of slower growth, as a regulatory loophole is effectively closed.

Ultimately, Australia is an advanced economy with a high rate of financial inclusion. BNPL does not act as an essential provider of micro loans in Australia as it does in some emerging markets. With that in mind, it is wise to introduce regulation that helps to reduce the number of BNPL users stretching their finances to buy items they do not need.